Analysis: Weidmann tries to muffle not spike Draghi's ECB guns

August 09, 2012|Paul Carrel | Reuters

(ALEX DOMANSKI, REUTERS)

FRANKFURT (Reuters) - Isolated but unbowed, German central bank chief Jens Weidmann is using all the soft power he can muster to stop the European Central Bank sinking into the political quagmire he fears from a new round of sovereign bond buying.

Weidmann is worried a plan ECB President Mario Draghi has hatched for the central bank to buy the sovereign bonds of Spain and Italy to lower their crippling borrowing costs would ease the pressure on those countries to put their finances right.

Such a plan also risks dragging the ECB into the business of financing governments, in which it is supposed to play no part.

Weidmann, who took the Bundesbank helm last year after his predecessor quit over a previous round of ECB bond buying, is acutely aware that he must uphold Germans' faith in the Bundesbank and the ECB, or else lose their support for the euro.

With Berlin pledging billions of euros in taxpayers' money to bail out debt-ridden euro zone countries, German voters expect the Bundesbank to act as their economic rock - and for Weidmann to play the role of "stability anchor" at the ECB.

But it is unlikely he could scupper Draghi's plan, given the German central bank is only one of 17 constituents at the ECB, albeit the first among equals.

Nor is it clear he would want to if the euro zone was pushed back to the edge of a precipice. Break-up of the currency bloc would be hugely costly to Germany and the Bundesbank.

Rather, Weidmann wants to keep the heat on indebted euro zone countries to reform and to pin as much of the burden as possible for dealing with the bloc's crisis on governments.

"His current opposition to bond-buying does not prevent the ECB from doing it, but it does signal to member states that they are still on the hook for crisis management. If the crisis were to take a turn for the worse, Weidmann would not block a greater role for the ECB provided this was done in concert with government action," said Mujtaba Rahman, analyst at political risk consultancy Eurasia Group.

One senior central banker told Reuters there was a "game of chicken" between the ECB and governments over who carries the burden for tackling the crisis, with the central bank ultimately ready to step in rather than see the currency union fall apart.

But just how far the ECB steps in is crucial.

"We could do something, with the ESM (bailout fund)," said another senior ECB policymaker, who expressed sympathy for Weidmann's position and was similarly reluctant to be drawn into a major bond-buying operation.

One of Weidmann's goals is to erect enough hurdles to any fresh bond buying in order to give him cover at home, where he faces pressure from Bundesbankers past and present and from academics led by Hans-Werner Sinn, head of the renowned Ifo research institute.

These conservative voices regularly paint any ECB action beyond inflation targeting as misadventure and a threat to the Bundesbank's role as guardian against the 1920s experience of hyperinflation that still scars the German national psyche.

Otmar Issing, one of the founding fathers of the euro and a former ECB chief economist, said on Thursday the latest plan would drag it into the political realm.

"This ultimately makes the central bank a prisoner of politics," Issing said. "This is a process that is very difficult to stop, because where do you set the limit?"

As well as retaining the public's trust, Weidmann must deal with conservative elements within the Bundesbank -- still employer to almost 10,000 people compared to 1,600 at the ECB -- who think they know better than their peers across town.

As one senior euro zone official put it: "If Weidmann can drag the Bundesbank into the euro zone era during his presidency, he will have done well."

SOFTLY, SOFTLY

Back in the 1990s, any one of the Bundesbank's board members could move global markets. Now Weidmann must use his guile - and leverage the domestic pressure he faces - to push his agenda.

The softly spoken 44-year-old has had some success.

After pledging on July 26 "to do whatever it takes to preserve the euro", Draghi a week later stopped short of the 'shock and awe' response markets were looking for and instead tasked three committees with exploring ideas the bank's policymakers could then decide to pursue.

In the interim, Weidmann had met Draghi one-on-one and again at last Thursday's meeting of the ECB's Governing Council, after which Draghi larded his plan with caveats and conditions.

The ECB was issuing "guidance" rather than taking a firm decision at this stage, Draghi said. It "may" undertake outright open market operations, but only if governments activated the euro zone bailout funds to buy bonds first - and even if the funds did so, ECB action would not follow automatically.

Draghi singled out Weidmann at his news conference last Thursday: "It's clear and it's known that Mr. Weidmann and the Bundesbank ... have their reservations about programs programs that envisage buying bonds."